The Short-Run Price Performance of Investment Trust Ipos on the UK Main Market

Abstract

The short run underpricing of initial public offerings (IPOs) is one of the best documented anomalies in finance. The Rock model explains this anomaly in terms of horizontal information asymmetry amongst investors. In this paper we use a comprehensive IPO data from the UK main market for the period 1989-96 to test the Rock model against several other alternatives. We propose that horizontal information asymmetry should be smaller for investment trust IPOs as compared to conventional issuing companies. The Rock model then predicts that investment trust IPOs should display less underpricing than conventional issuing companies. Our findings support the Rock model and are consistent with previous studies of investment trust IPOs.

Keywords: Initial public offerings, investment trusts, short-run underpricing

JEL Classification: G14, G24, G25